When shopping for a mortgage, it’s critical to have a general understanding of how the fees, rate and payment all connect to your bottom line. Here are tips better to identify your net tangible benefit on a home loan…
Rates & fees
The cost of an interest rate (mortgage pricing) moves with ebb and flow of the market. If you are eyeing a particular interest rate, understand the cost to obtain that rate may change daily until you lock-in your loan rate. Some lenders allow you to lock your rate upfront while others require your loan to be underwritten or have the appraisal ordered prior.
Mortgage pricing also referred to as “points” are broken down into tiny incremental units called “basis points” which are 1/100th of 1%. Basis points are used to describe the cost of a pricing change with the particular coupon/interest-rate on any given day in the marketplace. For example you might hear a lender quoting 3.75% no points on a 30 year fixed rate loan while another may quote 3.75 with a .5 point for the same rate chosen-3.75%. The lender offering the .5 cost is also expressed as cost of 50 basis points.
Here’s a quick cheat sheet breakdown:
100 basis points=1%
75 basis points=.75%
50 basis points=.5%
25 basis points=.25%
O basis points=0 points also called ‘par pricing’ in the lending industry.
You can choose from any one of the following mortgage pricing scenarios in most, but not all circumstances for a rate chosen:
- Points where you pay premium to purchase the interest-rate down and subsequently a lower monthly mortgage payment. In most mortgage scenarios you have the choice to pay this point based on the interest rate, and other times you might not do to loan-to-value, loan size, loan program, loan purpose, property occupancy or credit score. Note: financing points pay not drop the payment so be sure to keep a watchful eye.
- No points this is what most people typically opt for, but the choice is entirely up to you.
- Credits this is where a particular interest rate generates an overage, a (basis point credit for a rate chosen) premium back to you which is applied towards closing costs. This precisely how a legitimate no points, no fees refinance works.
An average day’s pricing change may be about 25 basis points up or down. For example let’s say you’re looking at that 30 year fixed rate at 3.75%, but you want no points. The next day if mortgage pricing deteriorates by 25 basis (remember .25%) then the rate is 3.75% at .25% charge (based on your loan amount). If the 3.75% rate improves by .25% then that would be a credit of as a function of your loan amount to pay the closing costs, which looks like this 3.75 (.25) credit.
Mortgage Tip: Anytime you’re seeing a mortgage rate with any form of credit, it is based on the rate chosen for specific day in real time. Always review APR as the benchmark cost measure.
How to determine what rate and fees are consistent with your financial goals
Ask yourself:
- How long will you keep the loan or property for?
- Do you plan to buy another property?
- Is retirement around the corner?
- Do you intend to pay the mortgage off in full?
- Do you want to pay dollars today to line up the future?
- Are the figures available based on your financial pictures consistent with any other goals you may have?
| No Points | |||||
| Purchase Price | $500,000 | ||||
| Downpayment (%) | 25% | ||||
| Downpayment ($) | $125,000 | ||||
| Loan Amount | $375,000 | ||||
| Interest Rate | 3.750%/ APR 3.78 | ||||
| Amortization (months) | 360 | ||||
| Payment | $1,737 | ||||
| Total Loan Cost | $625,206 | ||||
| Points Option 1 | Points Option 2 | Points Option 3 | |||
| Description: 30yr fixed rate | Description: 30yr fixed rate | Description: 30yr fixed rate | |||
| Points Fee | 0.63%/APR 3.70 | Points Fee | 1.45%/APR 3.65 | Points Fee | 2.13%/APR3.55 |
| Fee ($) | $2,363 | Fee ($) | $5,438 | Fee ($) | $7,969 |
| New Rate | 3.625% | New Rate | 3.500% | New Rate | 3.375% |
| Revised Payment | $1,710 | Revised Payment | $1,684 | Revised Payment | $1,658 |
| Change | $26 | Change | $53 | Change | $79 |
| Recapture (months) | 89.18 | Recapture (months) | 103.05 | Recapture (months) | 101.10 |
| Original Loan Cost | $625,206 | Original Loan Cost | $625,206 | Original Loan Cost | $625,206 |
| Revised Loan Cost | $615,669 | Revised Loan Cost | $606,210 | Revised Loan Cost | $596,830 |
| Savings Over Loan Term | $9,537 | Savings Over Loan Term | $18,996 | Savings Over Loan Term | $28,376 |
If you are uncertain about your short and long term financials goals, taking a conservative low cost/low payment loan is usually a sound bet. An experienced mortgage professional can provide cost vs. benefits much the illustration above to help you determine which rate and pricing scenario best suits you.
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